The payments industry has undergone a radical transformation over the past few years, thanks to the introduction of digital wallets, peer-to-peer payments online, and of course, buy now pay later (BNPL) functionality.
BNPL is rapidly revolutionising consumer behaviour:
So why is BNPL such a potent payment innovation?
First, it allows consumers to buy goods (often interest-free) without resorting to using their credit cards. They can simply make a small contribution to the total cost at the point-of-sale (POS) and agree to pay the rest back in instalments at a later date.
So long as you pay back what you owe on time, there’s no negative impact on your credit score. But if you aren’t able to repay the cost of the good(s) then this dream scenario can quickly turn into a nightmare—both for you individually as well as for the institution that you owe.
This blog will examine the wider impact that BNPL functionality could have on the economy before outlining how modern debt collection solutions can help prevent any unwanted challenges.
Economies are finely tuned machines. Any major development that changes the status quo—for instance, by reinventing consumers’ purchasing habits—will cause a ripple effect throughout the entire ecosystem.
With this in mind, there will likely be three major consequences that emerge from the widespread adoption of BNPL services:
There’s one reason why BNPL is suddenly so popular: they’re convenient for consumers. People can buy goods and services without having to pay for them at that point in time. They can defer payment—yet they’ll get the good instantly.
BNPL is made all the more attractive when you consider that many BNPL services offer 0% interest rates. In fact, some even have 0% interest rates on late payments. This is almost too good to be true. Consumers don’t have to pay upfront and there is no interest, even if they miss a payment at some stage down the line.
It’s never a good idea to purchase goods that you can’t afford. But that’s precisely why BNPL seems so attractive. You don’t actually need to be able to afford whatever you’re buying—at least not at that moment. Unfortunately, this is also why it can be so dangerous to consumers.
As Forbes states: “There’s the risk that BNPL is simply goosing retail sales and encouraging buyers to overextend themselves. Because the loans are not secured, just like a credit card, there’s nothing to stop a consumer from racking up balances with multiple services…”
Not all BNPL providers offer 0% interest on late payments. In fact, the majority issue penalties and fines to discourage late payments and these can quickly add up and compound the problem. If a consumer is unable to make their pre-arranged repayment, they definitely won’t be able to pay back the original amount plus the penalty/fine.
This is hardly surprising. If consumers aren’t able to pay back what they owe, financial institutions will have to carry the burden of increased debt. They’ll have to spend precious time, energy, and money trying to recoup what they’re owed—and this will significantly impact their own bottom line.
BNPL is great in theory. However, if consumers fall behind their repayments, its appeal will quickly disappear for individuals and financial institutions alike. BNPL firms have even been warned that they might be “… the next Wonga waiting to happen”, which refers to the controversial lender that went bust after it was owed more than £400 million in short-term loans from over 200,000 customers.
BNPL is set to create a wave of challenges for financial institutions. Consumers will borrow more and might not be able to pay back what they owe, which will therefore leave financial institutions in debt. That’s unless financial organisations can collect what they are owed as efficiently and cost-effectively as possible.
Fortunately, this isn’t as hard as it might seem—provided they have four key solutions at their disposal.
1. Custom collections scoring
Just as credit scores indicate how likely a customer is to pay back their debts, collections scoring also demonstrates if customers are likely to meet their scheduled repayments. However, different financial institutions will have different criteria to determine if a customer belongs to a high-risk group. Therefore, collections software which offers a customisable collections scoring feature based on various risk categories defined by individual companies can help businesses go beyond the traditional segmentation.
2. Self-cure collections portals
Self-service functionality puts control back in consumers’ hands. They can take charge of the process, repaying what they owe, when they can, on their preferred channels. This flexibility and sense of agency drastically increase the likelihood that customers will engage in the dunning process.
3. All-in-one case management
Dive deeper into each individual past-due customer. Understand their personal context, their financial situation, and their individual communication preferences. Use these insights to provide personalised dunning strategies that are tailored according to their specific needs—and watch your results improve instantly.
4. Debt portfolio assessment
Stay on top of your loan portfolios at all times. Identify whether your strategies are working as intended, and if not, change them immediately. Receive real-time performance data and boost your strategic decision-making capabilities.
BNPL is an exciting financial services innovation—and its popularity is set to increase even further going forward. But be warned: if your financial institution isn’t prepared for the upcoming wave of consumer debt, you’ll suffer.
Prepare by implementing a comprehensive debt collection solution that provides custom collections scoring, self-cure portals, all-in-one case management functionality, and debt portfolio assessments. Want to know how to stay on top of your collections portfolio and increase your repayments rate from day 1? Get in touch with us to learn more about our leading debt collection management system.
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